Business Overview and History
Nordstrom, Inc. (JWN) is a leading fashion retailer that has successfully navigated the evolving retail landscape by seamlessly blending its physical and digital presence. The company's unwavering commitment to delivering exceptional customer experiences, coupled with its strategic investments in technology and brand development, have positioned it as a formidable player in the highly competitive apparel and accessories industry.
Nordstrom's origins can be traced back to 1901, when John W. Nordstrom and Carl F. Wallin opened a small shoe store in Seattle, Washington. Over the decades, the company has transformed from a single shoe store into a diversified retailer with a robust portfolio of banners, including the eponymous Nordstrom stores, Nordstrom Rack, and ASOS Nordstrom.
The company gradually expanded over the next few decades, opening additional stores in the Pacific Northwest region. In 1923, the company incorporated as Nordstrom Incorporated and continued growing its footprint across the western United States. The 1960s marked a major milestone for Nordstrom as the company went public and began expanding beyond its Seattle roots. Over the next two decades, Nordstrom opened stores in major markets like California, Oregon, and Arizona, establishing itself as a leading upscale fashion retailer.
In 1978, the company launched its first Nordstrom Rack off-price concept store, which has since become a significant growth driver for the business. Nordstrom faced significant challenges in the 1990s and early 2000s as it struggled to keep up with changing consumer preferences and increased competition from e-commerce retailers. The company underwent major restructuring efforts, closing underperforming stores and investing heavily in its digital capabilities.
In the 2010s, Nordstrom continued to evolve its business model, investing in omni-channel capabilities to better serve customers across its full-price and off-price banners. The company made strategic acquisitions, such as the purchase of Trunk Club, a personal styling service, in 2014. Nordstrom also focused on enhancing its e-commerce platform and expanding its Nordstrom Rack concept.
As the retail landscape evolved, Nordstrom recognized the importance of embracing e-commerce. The company launched its first website, Nordstrom.com, in 1998, and has since invested heavily in its digital capabilities to provide customers with a seamless omnichannel experience. The acquisition of ASOS Nordstrom in 2023 further bolstered the company's online presence and its ability to cater to younger, digitally-savvy consumers.
Financial Performance and Ratios
Nordstrom's financial performance has been solid, with the company consistently generating strong revenues and profitability. In the fiscal year ended January 31, 2024, the company reported net sales of $14.69 billion, a 5.4% increase compared to the previous year. Net income for the same period was $134 million, with an operating cash flow of $621 million and free cash flow of $52 million.
In the third quarter of fiscal year 2024, Nordstrom delivered solid results with net sales reaching over $3.35 billion and earnings per share of $0.33. Both the Nordstrom and Nordstrom Rack banners delivered 4% comparable sales growth in the third quarter. The company's digital sales grew 6.4% in the third quarter, representing the sixth consecutive quarter of sequential improvement.
The company's financial ratios further demonstrate its financial strength. As of the most recent reporting period, Nordstrom's current ratio stood at 1.19, indicating a healthy ability to meet its short-term obligations. The debt-to-equity ratio of 1.46 suggests a moderately leveraged capital structure, which the company has been actively managing to optimize its financial flexibility.
Nordstrom's return on equity (ROE) for the trailing twelve months was 39.17%, reflecting the company's efficient use of its shareholders' capital. Additionally, the company's adjusted EBITDA margin of 7.9% in the fiscal year 2024 highlights its ability to generate robust operating profitability.
Liquidity
Nordstrom has maintained a strong liquidity position, which is crucial for navigating the dynamic retail landscape. The company's current ratio of 1.19 and quick ratio of 0.51 indicate that it has sufficient current assets to cover its short-term liabilities. This healthy liquidity position provides Nordstrom with the flexibility to invest in growth initiatives, manage inventory levels, and weather potential economic uncertainties.
As of November 2, 2024, Nordstrom had $397 million in cash and cash equivalents and $772 million of available short-term borrowing capacity on its $1 billion revolving credit facility, which expires in May 2027. The company's adjusted debt to EBITDAR ratio, a key leverage metric, was 2.8x as of the end of the third quarter of 2024.
Operational Highlights and Strategies
Nordstrom's success can be attributed to its unwavering focus on delivering exceptional customer experiences across its multiple retail banners. The company operates two main product segments: Nordstrom and Nordstrom Rack.
The Nordstrom segment includes the Nordstrom.com e-commerce site, Nordstrom U.S. stores, and Nordstrom Local service hubs. This segment offers a curated selection of merchandise with a focus on providing customers with a superior service experience both online and in-store. In the third quarter of 2024, Nordstrom net sales and gross merchandise value (GMV) increased compared to the same period in 2023, driven by an increase in the number of items sold, partially offset by a decrease in average selling price per item. For the nine months ended November 2, 2024, Nordstrom net sales and GMV also increased, reflecting growth in both the number of items sold and average selling price per item. Nordstrom's comparable sales increased 4% in the third quarter and 2.1% for the nine-month period.
The Nordstrom Rack segment includes the NordstromRack.com e-commerce site, Nordstrom Rack U.S. stores, and Last Chance clearance stores. This segment focuses on offering customers great brands at great prices. Nordstrom Rack net sales increased in both the third quarter and nine-month period of 2024 compared to the prior year, driven by growth in both the number of items sold and average selling price per item. Nordstrom Rack's comparable sales increased 3.9% in the third quarter and 5.2% for the nine-month period.
Nordstrom has consistently expanded its Rack footprint, opening 23 new stores in the fiscal year 2024, bringing the total to 280 stores. This strategic expansion has allowed Nordstrom to capture a larger share of the off-price market and attract a broader customer base.
Furthermore, Nordstrom has actively invested in its digital capabilities to strengthen its omnichannel proposition. The company's efforts to enhance its online platforms, improve inventory management, and provide convenient fulfillment options, such as buy online, pick up in-store, have been well-received by customers and have driven digital sales growth.
Nordstrom's emphasis on brand development has also been a key differentiator. The company's private label brands, including Nordstrom, Zella, and Open Edit, have gained significant traction, contributing to the company's overall profitability and customer loyalty.
Risks and Challenges
While Nordstrom has demonstrated resilience, the company faces several risks and challenges that warrant consideration. The highly competitive nature of the retail industry, with fierce competition from both traditional and e-commerce players, could put pressure on Nordstrom's market share and profitability.
Additionally, the company's reliance on discretionary consumer spending makes it vulnerable to economic downturns and shifts in consumer preferences. Nordstrom must continuously adapt its product assortment and marketing strategies to stay relevant and captivate its target audience.
Supply chain disruptions, labor shortages, and inflationary pressures are other factors that could impact Nordstrom's operational efficiency and financial performance. The company's ability to manage these challenges effectively will be crucial to its long-term success.
Recent Developments and Future Outlook
In March 2023, Nordstrom announced the wind-down of its Canadian operations, resulting in $284 million in charges associated with the wind-down in the nine months ended October 28, 2023. The company now sells exclusively in the United States market.
In April 2024, Nordstrom's Board of Directors formed a special committee in response to interest from the CEO and President/Chief Brand Officer in pursuing a potential transaction to take the company private. On September 4, 2024, the special committee confirmed receipt of a proposal from the Nordstrom family and a partner to acquire the company for $23 per share in cash. The special committee is reviewing the proposal.
Nordstrom is focused on three key priorities in 2024: driving Nordstrom banner growth, operational optimization, and building momentum at Nordstrom Rack. The company is investing in digital capabilities, supply chain improvements, and expanding its Nordstrom Rack store footprint to enhance the customer experience and drive profitable growth.
For the full year 2024, Nordstrom has provided updated guidance, projecting revenue growth in the range of flat to an increase of 1%, which includes a headwind of approximately 135 basis points from the 53rd week in 2023's results. The company expects total company comparable sales growth of 1% to 2% in 2024, versus 52 weeks in 2023. Full-year EBIT margin is anticipated to be in the range of 3.6% to 4.0%, with earnings per share projected between $1.75 and $2.05, excluding the impact of any share repurchases. Nordstrom continues to expect its effective tax rate to be approximately 27% for the full year.
Conclusion
Despite the challenges, Nordstrom's strong brand recognition, diverse retail banners, and ongoing investments in omnichannel capabilities position the company for continued growth. The company's emphasis on providing exceptional customer experiences, leveraging data-driven insights, and expanding its presence in the off-price segment are all strategic initiatives that are expected to drive future success.
As Nordstrom navigates the evolving retail landscape, its ability to adapt, innovate, and maintain its competitive edge will be crucial in driving long-term shareholder value. The company's solid financial performance, strong liquidity position, and strategic focus on omnichannel excellence position Nordstrom as a compelling investment opportunity in the dynamic fashion retail industry.